Why the gold ‘mega bears’ are wrong

Nigam Arora is an engineer, nuclear physicist, author, and entrepreneur and
the founder of two Inc. 500 fastest growing companies. He is also the developer
of the ZYX Change Method
to profit from change by investing. The premise is that most money is made by
predicting change before the crowd. Arora is the chief investment officer at
The Arora Report and the
editor of four newsletters that track the ZYX Change Method. Nigam can be
reached at Nigam@TheAroraReport.com.

After the recent collapse in gold and silver, some mega bears are coming out of the woodwork. Several have targets that are scary for investors in gold, with them predicting a fall below $1000 for gold, with $800 appearing to be a favorite number. (I have seen targets as low as $400.) But these seem like extreme responses to a significant drop and in my opinion, may not be accurate takes on where gold is likely to end up.

Before you read further, please understand that I am neither a gold bug nor a permabear on gold. My calls on gold and silver are a matter of public record, with the most recent being to sell half of the gold holdings at $1904 and the other half at $1757. Ever since then, our models have suggested not entering long-term positions from the buy side in the precious-metal complex.

Let’s take a look at why I think the mega bears on gold and silver are wrong.

At The Arora Report we have been analyzing trading data on gold, silver and miners from across the globe since 2007, including trading data on popular ETFs such as the SPDR Gold Trust
GLD, +0.63%
iShares Silver Trust
SLV, -0.07%
Market Vectors Gold Miners ETF
GDX, +2.15%
and Market Vectors Junior Gold Miners ETF
GDXJ, +1.90%
while also following several of the individual gold miners. The chart shows the zone where the vast majority of buying in gold was done by the momentum, or momo, crowd.

The best way to look at gold is through the lens of supply and demand. Our initial projections when we issued our sell call was that the fair value of gold was in the zone of $1,200 to $1,425. At this point, There is simply not enough data since the recent plunge in gold prices for our models to calculate a new fair value at this time.

But taking a look at the trading data, which is what we specialize in, we have estimated that in all likelihood, if the momentum crowd panics and sells, such selling will be exhausted by the time gold reaches $1025; further institutional selling will also be exhausted by the time gold reaches under $1100.

If such a scenario were to occur, short-term aggressive traders will find $1000 as a magnet and may drive gold to that price. Right under $1000 there are likely to be many stops. Hunt-and-destroy algorithms may hit such stops, briefly driving gold below $1000. But after such stops are taken out, gold is likely to snap right back over $1000. From there onward, gold is likely to start a steady march upwards. The point is that in all likelihood, there are not going to be enough sellers to drive the price of gold to $800 or lower. Please note that our models are not cast in stone, they are adaptive, i.e., they automatically change with market conditions.

It is important to note that I am not predicting the foregoing scenario will occur for sure. It is simply one of the scenarios among many scenarios in our analysis that we use to make our investment decisions in precious metals and use along with our models and algorithms to provide our ratings on gold and silver in various time frames.

We took profits on our silver short position on April 15 and 16, and currently have no short position in metals except for a short position in silver miner First Majestic
AG, +1.66%

On April 16, which turned out to be the low in precious metals, we made the following recommendation to our subscribers:

"We are upgrading ratings on gold and silver in the very, very short-term to mildly positive, and neutral in the very short-term.

Here are our current ratings on gold and silver.

Mildly Bullish in the very, very short-term.

Neutral in the very short-term.

Negative in the short-term.

Negative in the medium-term.

Negative in the long-term.

Positive in the very long-term.

The next resistance levels on gold are $1430-$1450 and then $1530-$1560.

The next support level is $1329-$1331 followed by $1230-$1250.

The momo crowd has made gold and silver markets very volatile. For this reason, the ratings above are not cast in stone and are subject to frequent changes.

As of this writing there is no change in our ratings, but please note that these ratings are updated frequently, and it is important not to get stuck in one point of view, but to remain flexible and truly listen to the new data. For definition of time frames, please click here.

Disclosure: Subscribers to The Arora Report have a short position in AG.

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